The Correction of Closing Errors
A final consideration has to do with the correcting of errors in the closing work of previous periods. Any omissions and wrong valuations of items in previous periods demand correction, but such correction must not be allowed to affect the results of the current period. These corrections must therefore be made either direct through surplus or by means of an entry in the final section of the profit and loss account as will be indicated in the next chapter. Sometimes where entries of this kind are numerous an account called “Profit and Loss Adjustment” is opened as a clearing account through which these items are carried net into surplus. The chief objection to this procedure is that the adjustments are too easily lost sight of when only the net results appear in surplus. These entries usually carry information of value to shareholders and they should therefore be set forth as a part of the statement of condition rendered at the close of each fiscal period.
CHAPTER XXVII
THE PROFIT AND LOSS SUMMARY—
FORM AND CONTENT
Standardization of Form
As stated in Chapter XXVI, the profit and loss summary is supplementary to the balance sheet and should always accompany it whenever it is desirable to make a full and comprehensive showing of condition. This summary is given various titles and is shown in various forms, depending somewhat upon the general class of enterprise to which it relates, the particular purpose for which it is compiled, and sometimes on the predilection of the person who draws it up or for whom it is drawn. With the passage of time the form of the summary, and to a less degree its content, tend to become standardized. The regulations of various governmental bodies have given an impetus in this direction. The Interstate Commerce Commission, the Comptroller of the Currency, public service commissions of various states, superintendents of state banks and of insurance—all require standardized reports from the concerns under their jurisdiction. The Federal Reserve Board has recommended certain forms of statement of both balance sheet and profit and loss to be submitted as the basis of credit by merchants and manufacturers. Investigations made by the Federal Trade Commission point out the desirability of a more uniform method of presenting the results of business activities than now exists. These regulations and requirements as to standard forms of statement do not interfere with the presentation of other forms of statement for other purposes than those required by the regulatory bodies. As local conditions frequently give rise to problems which are peculiar to individual concerns, standard forms of statement will not always meet local needs. Flexibility to meet given conditions, and deviation from set forms must always be permissible if the accounting department is to render the highest kind of service of which it is capable.
Synonymous Terms
Various titles are used as synonyms for the profit and loss summary, among which are the following: Statement of Profit and Loss, Loss and Gain, Outlay and Income, Revenue, Revenue and Expenditures, Income, Income and Expenses, etc. Of these, the term most generally used is “Profit and Loss.” “Business Statement” and “Statement of Outlay and Income” are phrases seldom if ever employed nowadays, while “Loss and Gain” finds little favor. Of the two terms, “Revenue” and “Income,” Revenue is used more often in connection with non-profit-making concerns, particularly in connection with state and municipal accounts. “Income and Expenses” is usually limited to the profit and loss statement rendered by clubs, churches, libraries, hospitals, etc., although the term “Revenue” is frequently used in this connection. “Income Statement” and “Account” are terms frequently applied to the profit and loss summary of trading, industrial, and professional concerns; but except where custom has established certain well-defined uses, as indicated above, the title “Profit and Loss” is all-sufficient; there is no doubt as to its meaning or content, and its use for summarizing the temporary proprietorship items is thereby established, particularly in connection with profit-making concerns.
Cost of Goods Sold—Manufacturing Concern
Profit-making enterprises may be roughly divided into several groups as follows: industrial or manufacturing selling, agency and commission, public carriers or transportation, and financial. The profit and loss summary for these different groups is, in the main, the same although, of course, the content of the summary depends materially upon the nature of the business. In all cases the source of income is from sales—whether of a commodity or of services makes little difference. The first deduction from gross earnings under the title “Sales” or other similar title is the cost of sales. At this point the first marked divergence among the various groups is met. In an industrial enterprise the cost of sales is the cost of goods manufactured and sold as well as the cost of any goods purchased for immediate resale. This latter cost is met only in enterprises which combine manufacture with selling. This does not imply that manufacturing concerns have no selling problem, but rather that in many cases they also purchase other products for sale along with their own product, perhaps as side lines.
For a manufacturing concern which sells only its own product, the first deduction from sales is the cost of the goods manufactured and sold. As stated in Chapter III, the elements of the cost of manufacture are: (1) material, (2) labor, and (3) factory expense. The cost of goods manufactured must be combined with any unsold output at the beginning of the period and a similar output at the end of the period, in order to determine the cost of the goods sold. Cost of manufacture corresponds roughly to the net purchases of a trading business.